Issues of Inflation, Unemployment and Economic Realignment (AQA A-Level History): Revision Notes
Issues of Inflation, Unemployment and Economic Realignment
Thatcherite priorities and the reversal of post-war consensus
Thatcherites drew on New Right ideology and monetarist principles to reshape Britain's economic priorities. They identified inflation as the primary threat to economic prosperity and looked to the post-war period for evidence. Their analysis blamed Keynesian economic policies for allowing inflation to escalate unchecked. This represented a major shift in thinking. If inflation could be brought under control, they reasoned, the economy would grow more successfully.
This reversed the post-war consensus which had regarded unemployment as the more serious problem requiring government action. The Thatcher government fundamentally reordered economic priorities, treating inflation control as paramount even if it meant accepting higher unemployment.
The control of inflation
Interest rate policy and its consequences
The Thatcher government employed interest rates as the main tool to suppress inflation. Rates were raised sharply to 17 per cent in 1979. This decision had considerable downsides. Higher borrowing costs made it more expensive for businesses to access capital, which reduced investment and expansion. The stronger pound that resulted from high interest rates damaged British exporters by making their goods less competitive in international markets.
The combination of high interest rates and a strong pound created a double impact on British businesses: they faced higher costs for borrowing while simultaneously finding it harder to compete in international markets. This policy cocktail pushed the economy into recession.
These factors combined to push the economy into recession. Output contracted, demand weakened, and many firms closed down, which triggered a sharp rise in unemployment.
Inflation trends 1979-1990
The inflation situation worsened before it improved. Initially, inflation surged to 22 per cent in May 1980, representing the highest rate of the period. From this peak, it declined steadily, reaching a low of 2.5 per cent in 1986. Government efforts to control inflation in the late 1980s involved attempts to maintain these lower levels, including eventual membership of the European Exchange Rate Mechanism (ERM). However, by 1990 inflation had climbed back to double figures, demonstrating the difficulty of sustaining price stability.
The graph below shows the volatile pattern of inflation across the Thatcher years:
| Year | Inflation Rate (%) |
|---|---|
| 1979 | 16.5 |
| 1980 | 15.9 |
| 1981 | 11.4 |
| 1982 | 7.3 |
| 1983 | 5.1 |
| 1984 | 4.7 |
| 1985 | 5.9 |
| 1986 | 3.0 |
| 1987 | 4.2 |
| 1988 | 5.9 |
| 1989 | 7.6 |
| 1990 | 10.9 |
Unemployment
The rise of mass unemployment
Because Thatcher's government prioritised controlling inflation over maintaining employment levels, keeping unemployment low ceased to be a primary policy objective. British industry needed to become more internationally competitive, and if this process led to higher unemployment, that was a price the government was prepared to accept.
The Human Cost of Monetarism
The consequences of this monetarist approach proved severe for British workers and communities. Many industrial plants shut down permanently during the early 1980s. This was not merely an economic statistic but represented the collapse of entire communities built around traditional industries.
By 1983, unemployment exceeded 3 million people, marking the highest level since the post-war period. This represented 13.5 per cent of the total workforce. The government did introduce some measures to address the problem. Youth Employment Schemes provided employers with subsidies to hire young workers, and employer National Insurance rates were reduced for lower-paid positions. Nevertheless, unemployment remained above 3 million until 1987, reflecting the government's determination that controlling inflation mattered more than reducing joblessness.
Deindustrialization and its impact
Deindustrialization describes the process whereby a country's manufacturing base contracts, with production shifting away from industrial goods. This represents a fundamental restructuring of the economy's foundation.
Britain experienced this transformation dramatically during the early 1980s. Manufacturing output fell by 15 per cent within just 2 years. In the West Midlands, production collapsed by a quarter. Steel production alone was cut by 30 per cent, to less than 14 million tons.
| Year | Manufacturing Employment (millions) |
|---|---|
| 1979 | 7.1 |
| 1981 | 6.1 |
| 1984 | 5.3 |
| 1987 | 5.1 |
| 1990 | 5.0 |
Regional variations in unemployment rates were pronounced:
| Date | % of Workforce Unemployed | Number Unemployed |
|---|---|---|
| Apr-Jun 1979 | 5.3 | 1,405,000 |
| Apr-Jun 1980 | 6.3 | 1,700,000 |
| Apr-Jun 1981 | 9.6 | 2,588,000 |
| Apr-Jun 1982 | 10.6 | 2,841,000 |
| Apr-Jun 1983 | 11.4 | 3,049,000 |
| Apr-Jun 1984 | 11.9 | 3,265,000 |
| Apr-Jun 1985 | 11.4 | 3,152,000 |
| Apr-Jun 1986 | 11.3 | 3,159,000 |
| Apr-Jun 1987 | 10.7 | 3,021,000 |
| Apr-Jun 1988 | 8.7 | 2,490,000 |
| Apr-Jun 1989 | 7.2 | 2,083,000 |
| Apr-Jun 1990 | 6.9 | 2,002,000 |
In certain regions where heavy industry had been dominant, such as Liverpool, unemployment rates reached as high as 25 per cent and remained in double figures throughout the 1980s. Workers found their traditional industrial skills were no longer in demand because they had been made obsolete by mechanization or flexible working arrangements. The shift towards service industries affected men more severely than women, and in numerous households women became the primary earners.
Economic realignment
The shift from manufacturing to services
Long-term economic changes were already affecting Britain's traditional industries even before the government's policies accelerated the process. Old labour-intensive industries faced mounting challenges from foreign competition and technological advances. Britain's economy was moving away from its foundation in manufacturing and heavy industry, becoming increasingly based on services.
Service industry refers to economic sectors that provide services rather than physical products. These services span travel, finance, media, retail, and many other areas. The shift from manufacturing to services represented a fundamental transformation in how the British economy operated and what types of jobs were available.
The Thatcher governments embraced this structural change.
Regional disparities and the north-south divide
However, for areas that had known little beyond coal mining, shipyards, and steelworks, people experienced painful adjustments. The foundations of working-class life and community identity crumbled. This sharpened what became known as the north-south divide, referring to the economic gap between the prosperous South of Britain and the struggling North. As traditional industries contracted, large areas of dereliction appeared in the Midlands, the northwest, the northeast, Scotland, and South Wales.
Regional data from the mid-1980s reveals the extent of geographical inequality:
| Region | Unemployment Level (% May 1986) | Job Losses/Gains 1979-86 | Average Weekly Household Income 1985 (£) | Owner-Occupiers (% 1985) |
|---|---|---|---|---|
| Scotland | 15.8 | -149,000 | 198 | 41 |
| Wales | 17.3 | -130,000 | 187 | 67 |
| Northern Ireland | 21.7 | -64,000 | 179 | 61 |
| North/Northeast | 19.1 | -215,000 | 170 | 62 |
| Northwest | 16.3 | -278,000 | 183 | 65 |
| Yorkshire and Humberside | 15.8 | -266,000 | 173 | 55 |
| West Midlands | 15.5 | -301,000 | 187 | 63 |
| East Midlands | 12.9 | -118,000 | 203 | 66 |
| Southwest | 12.2 | -39,000 | 209 | 69 |
| East Anglia | 11.2 | +23,000 | 205 | 66 |
| Southeast | 10.1 | -73,000 | 248 | 64 |
The worst-affected regions were the Midlands, the North, central Scotland, and South Wales. Areas in the south and southeast experienced less severe impacts. The Southeast maintained the lowest unemployment rate at 10.1 per cent in May 1986, with average weekly household income of £248, substantially higher than regions such as the North/Northeast at £170. This represented a massive disparity in living standards across the country.
Urban decay and social consequences
This economic transformation manifested in urban deterioration across many inner city areas. Problems of poor health and depression intensified, accompanied by rising alcoholism and drug abuse. Young people could no longer expect to follow their parents into traditional industries. Many were forced to relocate. Long-established patterns of economic activity shifted towards London and the south, fundamentally changing the character of numerous towns and cities.
In 1981, Geoffrey Howe advised Thatcher that certain cities such as Liverpool could be allowed to undergo 'managed decline'. This phrase captured the government's willingness to accept the deterioration of former industrial centres as an inevitable consequence of economic restructuring.
Social unrest and the 1981 riots
Urban tensions erupted in a series of riots between April and July 1981 in Brixton (London), Handsworth (Birmingham), Toxteth (Liverpool), and Chapeltown (Leeds). Further disturbances occurred in 1985 in Brixton, Handsworth, and Tottenham (London).
The Scarman Report was commissioned to examine the causes of the 1981 riots. It identified poverty and race as the central factors. Areas where riots occurred were experiencing high unemployment and severe deprivation. This situation was worsened by the fact that these were also areas with significant young black and Asian populations who felt the police unfairly targeted them. Despite the Scarman Report and subsequent changes to policing policies, additional riots took place in 1985.
The 'sus law' gave police officers authority to stop and search individuals they suspected might commit a crime. Black people and those from ethnic minorities believed the police unfairly targeted them under this law. Shortly before the Brixton riots, Operation Swamp stopped 1000 people in 6 days in an attempt to reduce street crime. Sus law was repealed later that year.
Regeneration and new investment
The economic realignment did eventually lead to investment and regeneration in some affected areas. Michael Heseltine, who continued to argue for greater government involvement in the economy, led redevelopment projects in dockland areas of both London and Liverpool. In London, the Canary Wharf development on the old West India Docks became the second most important financial district in the country after the City of London, symbolizing the shift towards service industries.
Historical Perspective on Economic Change
Left-leaning journalist Peter Jenkins, writing in his 1987 book The Thatcher Revolution: the death of the Socialist Era, commented on economic realignment in the 1980s. He argued that it was impossible to disentangle the effects of Thatcherism from changes that were already underway. Unemployment had already been rising before Thatcher came to power, income inequality was already increasing, and the growth of a new urban underclass was already in progress.
He described this as 'Mrs Thatcher's Britain' but noted it was not entirely of her making. What happened was not solely a dislocation caused by Thatcherism. However, the process of polarization between different groups and regions was intensified by policies designed to accelerate adjustment rather than soften its economic and social costs. The regime she led was tougher, and she presided over some of its consequences. While this polarization had qualitative and quantitative dimensions, Britain's peripheral council estates, planning disasters, and declining inner city areas were becoming increasingly detached from mainstream society.
Overall, the economic realignment that followed from Thatcher's economic policies depended heavily on geographical location. Britain appeared to be a very different place depending on whether one lived in Sheffield or Swindon.
Key Points to Remember:
- Thatcher prioritised controlling inflation over unemployment, reversing the post-war consensus that unemployment was the greater problem.
- Interest rates were raised to 17 per cent in 1979 to control inflation, causing recession, falling output, and rising unemployment.
- Unemployment exceeded 3 million by 1983 (13.5 per cent of the workforce) and remained high throughout the 1980s; manufacturing employment fell from 7.1 million in 1979 to 5.0 million by 1990.
- Economic realignment from manufacturing to services created a sharp north-south divide, with traditional industrial regions in the Midlands, North, Scotland, and Wales experiencing high unemployment (15-21 per cent), job losses, and lower incomes compared to the Southeast.
- Urban decay and social deprivation contributed to riots in 1981 and 1985; the Scarman Report identified poverty, unemployment, and racial tensions as causes, though some regeneration occurred in areas like London's Canary Wharf.